STRENGTHS

WEAKNESSES

External trade too concentrated on Mainland China and the United States

Massive relocations weakening the employment market

Services sector’s lack of competitiveness

Infrastructures lagging behind those of other advanced Asian economies

RISK ASSESSMENT

Activity will continue to be hit by the Chinese economic slowdown

After falling steeply in 2015, growth is expected to increase slightly in 2016. However, economic activity will remain tightly constrained by the slowdown in activity in Mainland China. Electronic products represent almost 40% of exports and external trade is expected to continue to stall, with a quarter of Taiwanese exports going to the Middle Kingdom. Poor performance by export companies is also expected to curtail investment. However, the healthy US economy and the slight euro zone recovery are expected to mitigate the effects of weaker Chinese demand.

Meanwhile, growth in household consumption, the main activity driver, is likely to remain modest. Despite unemployment and inflation still being very low, the near-stagnation of wages has hit consumer confidence. Nevertheless, during summer 2015, the authorities put measures in place to support household purchasing power through subsidies on the purchase of smartphones, domestic appliances and overnight stays in hotels. In addition, companies which increased staff wages benefitted from tax relief.

Finally, Taiwan is expected to continue strengthening trade links with the People's Republic of China, and in particular the Economic Cooperation Framework Agreement (ECFA). Following the signing of free-trade agreements with Singapore and New Zealand in 2013, Taiwan is trying to open its economy further. Difficulties in setting up the free-trade areas are however slowing its economic expansion.

A robust financial situation

The budget deficit, in decline since 2012, is likely to narrow further in 2016, with the government continuing to conduct a policy of fiscal consolidation. Despite the economic slowdown observed in 2015, the 2016 budget is not expansionary. However, the allocation of spending is expected to foster the development of infrastructures, notably for transport. In this context, the public debt, already at a sustainable level, will continue to reduce.

The current account surplus is expected to deteriorate but will remain high. It is generated, in particular, by a large trade surplus as well as by a balance of services surplus. Since the resumption of commercial flights from Mainland China in 2008, the Island has welcomed a significant number of Chinese tourists. However, the Chinese economic slowdown is likely to result in worsening trade and services balances.

Furthermore, Taiwan's external position is firm: the Island is one of the world's main creditors and foreign exchange reserves will remain very high (more than 18 months of goods and services imports in 2016). Buoyed by the considerable current account surplus, the Taiwanese dollar is likely to remain stable against the US dollar. The monetary policy will remain accommodative to support activity, limit the currency's appreciation and to maintain the price-competitiveness of exports.

Potential change of government in 2016

President Ma Ying-Jeou (Kuomintang, KMT), re-elected in 2012 and aware of the need for international economic agreements to compensate for the lack of official diplomatic relations, has implemented a policy of economic liberalisation and openness to the outside world. Whilst the policy of rapprochement with China was initially well received by the Taiwanese, they do not seem eager to extend that collaboration to the political field.and have made this clear.

In March 2014, the Sunflower student movement demonstrated its opposition to the TISA (Trade In Services Agreement) and more widely to the increasing influence of China over Taiwan, culminating in a three-week blockade of the Parliament. These demonstrations highlighted the fear of greater economic dependence and the opening of unification talks. By upsetting China, they have also reduced the chances of implementing other regional integration projects subject to Beijing’s goodwill.

The demonstrations against the normalisation of relations with Beijing, economic liberalisation and also nuclear energy development have destabilised the nationalist party government, which has been forced to step back. Nonetheless, discussions are continuing as evidenced by the historic meeting of Presidents Ma Ying-Jeou and Xi Jinping in Singapore on 7 November 2015.

However, the fall in the KMT's popularity means that the 2016 elections could favour the main opposition party, the Democratic Progressive Party (DPP), which has the toughest stance on China. Still, Taiwan will continue to enjoy a very conducive business climate.